Advanced Energy Industries - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Advanced Energies Industries Fourth Quarter twenty twenty Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand today's conference over to your speaker, Edwin Mock, Vice President of Strategic Marketing and Investor Relations. Thank you.

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy's fourth quarter twenty twenty earnings call. With me today are Yuval Wassman, our President and CEO Paul Oldham, our Executive Vice President and CFO and Brian Smith, our Director of Investor Relations. If you have not seen our earnings press release, you can find it on our website at ir.advancedenergy.com.

There you also find a slide presentation to follow along our discussion today. Before I begin, I would like to mention that AE will be participating at several investor conferences in the coming months. As events occur, we will make the announcements. Let me remind you that today's call contains forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks and uncertainties is found in our filings with the SEC.

All forward looking statements are based on management's estimates, projections, and assumptions as of today, 02/10/2021, the company assumes no obligation to update them. Long term targets present today, including our aspirational goals and our long term vision goals, should not be interpreted in any respect as guidance. On today's call, our financial results will be presented on a non GAAP financial basis unless otherwise specified. Exclude from non GAAP results are amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains or losses, and restructuring items. Detailed explanation on our non GAAP financial measures as well as reconciliations between GAAP and non GAAP measures can be found in our press release today.

With that, let me pass the call to our president and CEO, Yuval Wassman. Yuval?

Speaker 2

Thank you, Edwin. Good morning, everyone, and thank you for joining us on this call. Advanced Energy finished last year on a strong note with Q4 twenty twenty revenue of $371,000,000 up 10% year over year and solidly above our guidance midpoint. Non GAAP EPS of 1.49 was at the top of our guidance range. The fourth quarter results were driven by strong demand for our products across most of our markets and good execution in an increasingly dynamic operating environment.

Service revenue again set a record. Our Q4 results built on a great year of financial performance despite the global coronavirus pandemic that presented all of us with extraordinary challenges. I'm extremely proud of our organization's response to the constant changes throughout the year demonstrating AE's agility and operational excellence. Our diversified global operation footprint, nimble supply chain, hub inventory management system and maintaining a healthy and safe workforce enabled AE to effectively meet shifting customer requirements and to deliver a strong 2020 results that outperformed the market. 2020 revenue grew 79% as reported and 18% on a pro form a basis to a record $1,400,000,000 with our semiconductor business growing 50% and data center computing growing 46%.

Our non GAAP earnings more than doubled to $5.23 per diluted share and we generated over 200,000,000 in cash flow from continuing operations. Paul will go into more financial details in his remarks. Advanced Energy is a clear leader in precision electric power conversion and control. Our power solutions are used in many of the enabling technologies behind the fourth industrial revolution and the data economy. Last year, AE not only capitalized on the accelerating megatrends of these markets, but we also introduced 12 new products to help speed up our customers innovation and expand our addressable market.

Examples of major innovations we brought to the market include EVOS, our beyond RF power solution that we believe will enable advanced plasma processes for multiple next generation technology nodes. Additionally, our system level 48 volt PowerShell will allow data centers to become more power efficient and cost effective. Our intelligent lighting and power control system will help indoor farms to substantially lower power consumption and cost while increasing crop yield. We now enter 2021 with a richer portfolio of differentiated products with that we expect will continue to enable breakthrough innovation by our customers and fuel our continuing growth. In line with our strategy to accelerate our growth and diversification through strategic acquisitions, At the end of twenty twenty, we completed the acquisition of Versatile Power, expanding our reach in the medical market with its field proven RF power supplies.

Versatile Power brings to AE well established experience working in highly regulated medical market and an eighteen year customer relationship with one of the leading medical technology companies. In addition, we expect to integrate Versatile's technology into our enterprise technology roadmap and to cross sell current Versatile solutions across our market verticals. This is another example of AE using smart acquisitions to grow our scope and leverage our scale. Our 2020 results affirm the success of the acquisition of Artesyn Embedded Power as we integrated the business into AE's scalable platform. Despite the COVID related challenges, we exceeded our integration milestones and delivered on our synergy goals And we believe that we are on track to meet or exceed our long term cost synergy target in roughly half the time of our original plan.

With a fully integrated functional organization structure, we have the scale and the scope to drive sustainable competitive advantages as a top tier industrial technology growth company as we continue to pursue our long term strategic and aspirational goals. In Q4, we continued our investment in ESG initiatives launching a new scholarship program to support increased diversity in STEM education. We have tremendous interest with applicants from multiple universities across various Now let me comment on our fourth quarter performance across our markets. Our Q4 semiconductor revenue was at the high end of our previously stated second half growth rate of 15% to 20% after an exceptional Q3 driven by robust demand in foundry logic and strengthening NAND. We expect this healthy market condition to further improve in Q1.

We're extending our leadership in semiconductors as we launch new products, including a new high power RF generator, the Paramount HP, and a new remote plasma source, the MaxStream. In addition, we shipped evaluation units of EVOS to a number of strategic customers during the quarter and we won an RF design for a next generation PECVD tool and at one of the top equipment OEMs. In Korea, we secured new RF design wins for a leading CVD platform and for a next generation etch for NAND application. In the $300,000,000 semiconductor embedded power market, we secured a new design win in backend equipment by replacing multiple competitors DC modules with our integrated solution. Overall, our success across multiple fronts will allow our semiconductor business to continue to outgrow the market.

Driven by increase in the semiconductor industry, we expect our demand to increase in Q1 and to further accelerate in Q2. Turning to our data center computing market, demand declined in Q4 as expected reflecting data center digestion among our hyperscale customers and a generally weak IT spending environment. We expect this market condition to extend into Q1, but we continue to anticipate growth to return later this year. In hyperscale, we are transforming from being a fast follower to becoming a market leader as we grew our 2020 revenue by over 250%. Although this market could be lumpy, we believe we are still in the early innings of this journey and expect meaningful growth over time.

We continue to make solid progress at new hyperscale customers and reiterate our target to deliver production shipments to additional Tier one hyperscale customers this year. We've also started to capture new opportunities created by the transition to 48 volt service. In Q4, an additional hyperscale customer selected our 48 volt PowerShell and we secured the design win for our board mounted 48 volt DC to DC converter at a tier one customer. In enterprise computing, we secured another high performance computing design win for a supercomputing platform at a leading customer. As we continue to capitalize on our industry leading efficiency and power density.

While the high volume production of these wins may take time, they support our roadmap of adding over $100,000,000 of annual incremental revenue by 2023. Industrial and medical revenues grew 8% sequentially, surpassing our expectations. Macro conditions improved in Q4 across several market as we saw good demand for solar cell manufacturing, flat panel display and hard coatings for consumer devices. We also benefited from growing demand for air filtration systems used in preventing the spread of COVID which is a win we reported last quarter. Revenue from medical applications declined sequentially on lower demand for some critical care equipment and elective care applications.

During the quarter, we secured several design wins for medical diagnostic applications with our families power supplies. Our strategy for industrial and medical is to enable smart applications through our portfolio of products with advanced digital capabilities. During the quarter, we introduced a multitude of new products across our application set from pyrometry and industrial heating to indoor farming and medical. While we expect industrial to be seasonally down in Q1 and medical to see further pressure based on our solid design win pipeline, we are well positioned to grow this vertical for the year as macro conditions improve. Revenues from telecom and networking applications remained about flat from Q3 and were up 20% year over year, reflecting a slightly improved market condition and success of some of our programs.

Overall, telecom investment remains constrained and networking is facing the general slowdown in IT infrastructure investment. With significant five gs investment still ahead, we are focused on winning the key five gs designs. In Q4, we secured an important five gs design win for a small cell radio primarily designed for The U. S. Market.

In networking, we want to design for a white box switch for a Tier one Asian hyperscale customer. We continue to optimize our portfolio for higher earnings growth. While in aggregate these actions will impact revenue over the short term, we believe the steps taken will focus our resources on higher value added opportunities and continue to improve overall margins. To summarize, Q4 and 2020 results demonstrate our unique position in benefiting from the fourth industrial revolution, our successful growth strategies across our markets and the strength of our culture. Our focus on being a pure play power leader is enabling us to outperform the markets we serve, gain market share and expand into new and exciting opportunities.

We have built a track record of growing earnings faster than our revenue and delivering top tier return on invested capital. At the end of twenty twenty, we announced a regular quarterly dividend demonstrating our ability to generate consistent cash flow and our commitment to regularly return capital to our shareholders while continuing to pursue inorganic growth. Looking forward, we will continue to invest aggressively in bringing new enabling products and solution to our markets. Our growing pipeline of design wins reflects our success in converting those investments into tangible results. Despite near term macro challenges due to the coronavirus, we expect our top and bottom line to continue to grow in 2021.

Going forward, AE is well positioned to deliver long term sustainable growth throughout innovation, technologies, products and services. Before I conclude my comments, this morning we announced that I will be retiring as President and CEO of Advanced Energy effective March 1. Steve Kelly, who some of you know as the previous CEO of EMCOR will become the President and CEO of Advanced Energy. To ensure a seamless transition, I will remain as an Executive Advisor to Steve and the Board through March 2022. I'd like to thank the Board, our shareholders, our customers, and most importantly, our employees for their support over the last few years.

It has been an amazing journey as we have grown the company, introduced new products and technologies, delivered record financial results, created shareholder value and transformed AE into an industrial technology growth company. I am proud of our accomplishments and I'm grateful for the relationships I have developed over this time. My retirement is a result of our standard succession planning process. I have worked closely with the board of directors to identify the right person as the next CEO for Advanced Energy. We look for a proven leader who builds teams, fosters innovation, drives strategic vision and creates shareholder value and we found these attributes in Steve.

Together with our leadership team, I'm confident that he will lead AE to the next level of success. With that, let me turn the call over to Paul.

Speaker 3

Thank you, Yuval, and good morning everyone. Before I begin, please note that all financial measures presented today will be on a non GAAP basis unless otherwise stated. This quarter, our non GAAP results also exclude $5,200,000 of restructuring costs, primarily related to the previously announced closure of our Shenzhen facility and $3,800,000 in non cash unrealized FX losses related to long term lease and pension liabilities. A reconciliation from GAAP to non GAAP measures can be found in our press release issued earlier today. We delivered outstanding financial results in the fourth quarter with revenue above the midpoint of our guidance and non GAAP earnings per share at the high end of our guidance range.

Despite the challenging environment, our team again executed very well, delivering to strong customer demand, primarily in our semiconductor and industrial markets. Combined with synergies and good cost control, we achieved our second highest quarter ever in operating income and cash flow generation and an annualized return on invested capital of over 20%. Fourth quarter revenue was $371,000,000 reflecting nearly 10% growth year over year, but down 5% sequentially from the record levels in Q3. Sales in the semiconductor were $166,000,000 up 32% from last year and almost flat to last quarter. Our full year and second half twenty twenty growth outperformed the market and industry again as we continue to extend our leadership in semi power.

Our R and D investments during the last downturn are yielding tangible results with multiple new product introductions and a strong pipeline of design wins. Looking forward, we expect semi demand to grow sequentially in the first quarter and further accelerate in Q2 on continued strength in foundry logic and increased demand in three d NAND applications. Data center computing revenue was $65,000,000 down sequentially as expected as the market digestion that began in Q3 continued into the fourth quarter. Looking forward, we expect cloud digestion to continue to impact our data center computing revenue in the near term with increased investment and the benefit of new design wins driving higher revenues later in the year. Revenue from our industrial and medical markets grew 8% sequentially to $94,000,000 The better than expected performance was driven by growth across several applications, including motion control, photonics and thin film coatings.

Medical revenues declined as expected from a strong Q3 due to critical care demand beginning to normalize. Looking forward, we expect industrial and medical revenues to decline seasonally in Q4, but be well above the revenue level from a year ago. Near term, the impact from COVID will continue to pressure this market, but improved macro conditions should benefit our industrial applications over time. Telecom and networking revenue was $46,000,000 in the quarter, down slightly from Q3, but up 20% year over year. Overall, global five gs investments outside of China are expected to remain relatively muted in the near term.

In addition, we expect our portfolio optimization actions to begin impacting revenues in this vertical as we pivot towards higher value applications. Non GAAP gross margin for the quarter was 39.5%, down slightly from 39.8% last quarter on lower volume. Year over year, gross margins increased three sixty basis points driven by material cost improvement, product mix and accelerated synergy actions, including portfolio optimization and productivity improvements across our factories. While we expect gross margin to decline modestly in Q1 due to lower volume and supply chain challenges, our planned synergy actions should further improve gross margins over the next several quarters, enabling us to sustainably achieve or exceed our initial gross margin target of over 40%. Non GAAP operating expenses were $76,900,000 down $2,000,000 from last quarter on lower variable expenses and timing of R and D project costs.

Our team did a good job of controlling expenses during the quarter. As a result, operating margins for the quarter were 18.7%. Non GAAP other expense was $2,300,000 including $1,300,000 of interest expense. We expect other expense to remain in the 1,500,000.0 to $2,000,000 range. Our non GAAP tax expense was $9,900,000 or 14.7%.

Looking forward, we expect the GAAP and non GAAP tax rate to remain in the 15% range. Non GAAP earnings for the quarter were $1.49 per share, down from $1.66 last quarter on lower revenue, but up 71% from $0.87 a year ago. Turning to our full year 2020 financial results. Revenue increased by 79 on an as reported basis to a record $1,420,000,000 On a pro form a basis, revenues grew 1850% growth in semi and 46% growth in data center computing, partially offset by declines in industrial and telecom markets, primarily related to COVID and macro factors. Our full year 2020 gross margin was 39%, approaching our initial long term model of 40% after just the first full year of Artisan integration.

Gross profit dollars increased almost 70% from 2019. Leverage on sales growth and synergies from the Artisan acquisition resulted in operating income more than doubling to $244,000,000 or 17.2% of sales. As a result, 2020 non GAAP EPS was a record $5.23 per share, up more than 110% from $2.44 in 2019. Turning now to the balance sheet. We ended the fourth quarter with cash and marketable securities of $483,000,000 up $51,000,000 from Q3.

Inventory declined by $35,000,000 and turns increased to 4.1 times due in part to timing and actions taken to structurally improve our inventory management. This improvement was largely offset by a reduction in accounts payable on lower purchases and associated DPO of fifty days. We expect both inventory and payables to increase in Q1 largely to manage supply chain constraints. Receivables decreased on lower sales and DSO rose slightly to fifty seven days. Total days of net working capital were ninety five, up two days from last quarter.

Operating cash flow from continuing operations was $67,100,000 just below the record level we generated last quarter. Full year operating cash flow was a record for the company at $2.00 $2,000,000 Free cash flow from continuing operations was $56,000,000 in Q4 and $166,000,000 for the full year. Capital expenditures for the quarter were $11,300,000 and depreciation was $7,300,000 We continue to expect capital expenditures to be about 2% to 3% of sales. During the quarter, we also repaid $4,400,000 of principal amortization on our debt, ending with total bank debt of $322,000,000 and net cash of $161,000,000 Our trailing twelve month gross debt leverage decreased to 1.2 times. During the quarter, we did not repurchase any stock.

Finally, as announced last week, we declared a quarterly dividend of $0.10 per share, which will be paid to shareholders of record as of February 22. Now let me turn to guidance. Overall, we expect Q1 demand to remain strong with sequential growth in semiconductor partially offsetting seasonal declines in industrial and medical and the impact of portfolio optimization in telecom and networking. Data center computing revenues are expected to be at similar levels as Q4. On a year over year basis, we expect solid growth across all our market verticals, except data center computing due to the market digestion following a strong ramp last year.

While we see strong demand for our products, the ongoing risks related to COVID-nineteen, combined with global supply constraints in the electronics industry, could impact our ability to fully meet this demand in the near term. Factoring these risks into our forecast, we are guiding Q1 revenue to be $350,000,000 plus or minus $15,000,000 Based on lower volume and higher supply chain costs, we expect non GAAP gross margins to be 38% to 39%. Operating expenses are expected to be up slightly on increased R and D investment. As a result, we expect non GAAP earnings to be $1.25 per share plus or minus $0.15 Before I open for questions, I would like to share some of my perspective on our business. As our 2020 revenue growth demonstrated, Advanced Energy is well positioned to benefit from the secular growth trends across our markets, while also gaining market share and expanding into new market opportunities.

The doubling of our earnings reflects solid execution by our team, our ability to deliver on our synergy plans and the operating leverage in our model. Looking forward, we are as excited as ever about the demand prospects for our business as we should have tailwinds across our markets in 2021. Although the impacts of COVID and challenges in global electronics supply chain may impact us over the next couple of quarters, we remain confident in both delivering growth in 2021 and in meeting our new three year aspirational goals of $1,650,000,000 in revenue and $7.5 in non GAAP EPS and in achieving our long term vision of $2,500,000,000 in revenue and $12 earnings per share over time. Finally, I would like to extend my personal thanks to Yuval for his vision, leadership, and commitment to advanced energy as he led the transformation and success of the company. I have personally enjoyed working with Yuval immensely over these last few years and wish him well in this new chapter of his life.

I equally look forward to working with Steve Kelly, and I'm confident in his ability to lead advanced energy to the next level of success. With that, let's take your questions. Operator?

Speaker 0

Thank you. And your first question is from the line of Mehdi Hosseini.

Speaker 4

Yes. Thanks for taking my question, and best of luck to you you all. I have one question for you all, and I want to better understand what instigated the change in the CEO role. I understand the succession plan, but I'm kind of surprised given your aspirational goals. So if you could provide us with some color would be great.

And then in terms of your report, how should I think about your traction in Japan? You talked about continued share gain, especially in semi cap. And I want see how you're tracking with the share gain, specifically in the Japan region. Thank you.

Speaker 2

Thank you, Mehdi. Regarding my my decision to retire, it is really part of our standard succession planning process. Full disclosure, I'll be turning 67 years old this year. And my plan is to spend more time with my family, friends, and pursue some of my personal interests. I've been working very closely with the board to identify the person that will have the right profile and attributes to continue to lead the company and pursue the strategy that we put together.

And as I said earlier, we found these attributes with Steve Kelly. We're excited about Steve joining the company. We believe that he has all the capabilities, skills, experience, and track record, to do just that. Regarding our, market share gains, as you know, '20 was an amazing year for us. We introduced tremendous amount of products.

Think more than any other company in our space in 2020 while managing the company through COVID nineteen. Some of these products are enabling and especially in the semi industry, some of these products will enable the next generation technology nodes, especially EVOS, MaxStream, the RFDS. We continue to gain traction. We continue to gain share. And one area that is really unique of strength of advanced energy is our RF matching networks.

We are the world leader in RF matching, which is really critical for the ability to deliver effectively RF powering to the plasma. This is another area we'll continue to grow, get traction and gain share. Specifically regarding Asia, we continue to have good design wins in Asia as I reported. Specifically to Japan, we are an increasing player in Japan with higher level of traction in very advanced applications. And beyond that, I cannot, share any more information.

Speaker 4

Got it. Thank you.

Speaker 2

Thank you, Meny.

Speaker 0

Your next question is from the line of Scott Graham with Rosenblatt Securities.

Speaker 5

Yes. Hi. Good morning, you all. Congratulations. I know we've only, known each other for a short while, but, obviously, the track record here has been terrific and you've really transformed this company.

So congratulations Thank

Speaker 2

you very and best of much. Sure.

Speaker 5

So I wanted to maybe talk about the three year goals well and maybe kind of piggyback onto the prior question. So why would we be putting these out now in front of the change at the top, particularly since, if I may, the EPS growth target, which I assume is for 2023, is a pretty healthy target. Could you talk through why we would be releasing this today rather than maybe waiting a quarter for Steve to have full input?

Speaker 2

So really, really good question. So as I said as I said earlier, the hiring of Steve was driven by a process that is a standard succession planning process. When we talk to the street about updated aspirational goals three years out, we at that point did not conclude on a successor. So in terms of timing, right, our decision to onboard Steve to the company came after our announcement of the aspirational goals. So there's nothing, you know, shifty or tricky about it.

The decision about my timing of retirement was driven by identifying the right successor. Right? And if we didn't identify the right successor, I probably will stay here for a longer period of time. So the timing of my retirement was driven by identifying Steve. Does that answer your question?

Yep. Yep. It does. It does. Yeah.

For the

Speaker 5

most part. If I could just sneak maybe one more in here. Again, you're hearing me not ask questions about the results, which I think are very straightforward. You had a nice quarter and all that. The guidance is very clear.

Again, maybe one on the longer term. So you're way ahead of plan on the integration of Artisan, and your balance sheet is kind of back to the on a net leverage basis really being liquid. Does this change from you to Steve slow down potentially the M and A process as Steve kind of gets his head around everything? Do you think there's a potential slowdown here? Was I guess I was thinking that 2021 would be a big year for M and A for you guys again.

Yes.

Speaker 2

So what is your thoughts there? Yeah. Good good question. So let me let me give you a little bit of background. Right?

Board the board has approved our strategic plan. The board has approved our long term goals. The board has approved the transition of CEO and me and the board together, you know, decided on hiring Steve and bring Steve to the company. Steve had a great opportunity to review the company strategy, to review our strategic goals, to review our aspirational goals both for three years out and seven years out. And after doing that, excitedly decided to accept our offer and join the company.

I do not expect to see any major deviation from our strategy going forward. Our business model, our financial model, our operational model have proven themselves over the last six years to be extremely capable, yielding results normally ahead of plan. And, we are very acquisitive and we do have a very healthy balance sheet with a dry part that will allow us to continue to pursue, inorganic growth. Steve has a great experience in his previous position at Amcor to go and pursue inorganic growth, acquiring companies, effectively integrating them, increasing value and and delivering the really strong shareholder value. So from my vantage point and after talking to Steve during the process of hiring him, Steve is fully aligned with our long term strategy and our long term aspirational goals.

And, again, supported by the board. Last comment, Steve and the management team compensation plan is linked directly to our long term goals and objectives.

Speaker 5

That's very clear. You all, again, congratulations. Thank you for the the answer and, you know, great job in transforming this company.

Speaker 2

Thank you very much. I really appreciate that.

Speaker 0

Your next question is from the line of Tom Diffely of DA Davidson.

Speaker 6

Yeah. Congratulations, from me as well. You've all, clearly impressive.

Speaker 1

Thank you, Tom.

Speaker 6

Have both a, a nice turnaround at the beginning of this story and then a really impressive growth in recent years. Job well done.

Speaker 2

Thank you for taking my my

Speaker 6

pleasure. Looking at the the end markets, it sounds like, you know, drop off a bit in industrial medical. Is that truly just seasonality or is there anything beyond that? And then adding to that on the telecom networking side, it sounds like you're trimming your portfolio a bit. Any more color on that would be helpful.

Speaker 2

Sure. So yes, indeed, the medical industrial definitely seasonality. And also, you know, our medical our medical business was really strongly affected by COVID-nineteen. As you recall last year, saw a burst of demand coming from critical care equipment that required our power supplies when the whole world was chasing ventilators and critical equipment. At the same time, we saw a decline in elective procedures that was a little bit of headwind.

Just to remind everybody, three years ago, our medical business was zero. Right? So we have entered the medical industry just a few years ago and started growing and expanding and it's part of our strategy. Going forward, we expect to see continuing growth in the medical space driven by design wins and entrance into new applications just like the one we announced about you know, entering into more diagnostic, very, very sophisticated diagnostic equipment. And also, I'm very excited about the acquisition of Versatile Power.

If you recall, our Analyst Day about eighteen months ago, we talked about an area in medical that we are going to pursue which is RF power supplies for medical applications. Versatile power brings to us deep knowledge, experience and capabilities in RF power supply that are used for highly invasive procedures. The reason we have brought Versatile Power was to accelerate our time to market. Right? They are a bonafide player supplying RF power supplies for one of the leading companies in the world in these procedures.

And now as a result of this acquisition, they brought us the scope and we bring them the scale to accelerate the growth and to leverage on the global infrastructure that AE has. In general, Industrial, you should expect to see our business operating and growing at GDP plus As we said earlier, we are pursuing a portfolio optimization strategy that is a combination of in some areas terminating end of life in products and some other areas increased prices and some other areas shifting the focus to higher value add products so that the mix will result in shifting of the gross margin bell curve to the right. And we are making great progress. The area that we mentioned earlier today in telecom and networking is an area that is more of a focus area in 2021. Although our strategy is to go across the board implementing a classical eightytwenty process to weed out the as I call the not very healthy products and continue to shift to high value solutions.

Did I miss anything, Tom?

Speaker 6

No. That's helpful. Maybe just as a quick follow-up. Paul, can you give us a feeling for how much lingering cost there is from COVID both in your OpEx and maybe even in your supply chain?

Speaker 3

Yes. We've talked about that kind of running in the 50 basis points range, and it bounces around a little bit more, a little bit less. As I mentioned in our prepared remarks, we are seeing some headwinds on supply chain costs specifically related to some of the logistics and shortages in part due to higher global demand and in part due to the fact that, you know, COVID still has many suppliers running below full capacity. So it is continues to be a a bit of a headwind for us in that range.

Speaker 6

Okay. Thank you.

Speaker 3

Yep.

Speaker 0

Your next question is from the line of Quinn Bolton of Needham and Company.

Speaker 6

Guys. Thank you.

Speaker 5

Thanks for taking my question. Yuval, congratulations on your retirement, and and thanks for your leadership over the past several years. Paul, wanted to start with you on your comments about the costs in the supply chain, potentially some shortages. Wondering if those component shortages are limiting your ability to meet demand in the first quarter? Or is your operations team able to get all of the semiconductor components you need for the power supplies to meet customer demand?

And then I've got a follow-up question.

Speaker 3

Yeah. I think when we talked about the guidance, we tried to be pretty open that our demand continues to be strong. But we do see risks in the operations around the supply chain, just getting getting enough parts. Obviously, you know, that's a that's something you're always dealing with and continue to deal with. It's a daily battle.

But we tried to have our guidance reflect the the environment we're operating in, which, you know, it's not us. It's it's a broad set of it's a it's a broad problem across the the microelectronics industry and electronics industry. And and and in the near term, we think that will impact, you know, our ability to to ship product. And that's contemplated in the numbers we've put out.

Speaker 2

So the the the forecast and the guidance are risk adjusted to reflect that, Quinn. And we have the benefit of reporting later in the month. So we have, I think, better visibility of what's happening in the market. And it's not across everything in the supply chain. It's really a few components.

Just a few components, IC components that affect us, the automotive industry and other industries. Obviously, you need all the bonds to be able to build the product. So the good news, we have really strong demand. And as I said earlier, our semi demand is growing at Q1 and we expect it to accelerate in Q2. Short term, our guidance reflects the risk adjustment related to shortage in ICs.

Speaker 5

Just a follow-up on that. Just wondering in in your conversations with supply chain, how long do you think that they will be capacity constrained? I think it takes probably six to nine months sometimes to bring on additional wafer supply. So wondering if you think it could be an issue you're facing for most of the year. And then my second question was going to be just around Yuvald, the update on the 48 volt PowerShell business.

It sounds like you're securing some additional design wins, but just wondering if you could give some more color on the 48 volt PowerShelf opportunity and and sort of design win status. Thank you.

Speaker 3

Yeah. It's a good question, Quinn. Obviously, it's a difficult one to answer. But clearly, everybody top to bottom in the supply chain is working together to to to get in more parts. And, of course, the demand continues to grow, as you've all said.

So we you know, this isn't gonna be solved in a week, but you would want we don't see it as a long term issue either. So,

Speaker 5

you know, we'll we'll

Speaker 3

be monitoring it closely. You know, we saw something a little similar last year with COVID onset where it took us a couple of quarters to catch up, if you will, in the factory to the demand. So we'll see how it goes, but clearly, is big area of focus for us and I think the whole the whole industry.

Speaker 2

Quinn, regarding the 48 volts, these are two separate wins. Number one is a new hyperscale customer for our 48 volt power shelf. And as you recall, the PowerShell is really a power supply that goes in the rack and support multiple servers, right? The second design win is a board mounted 48 volts that converts from 48 volts to 12 volts DC DC converter. And this one is designed into the server itself, not in the shelf.

So these are two in a way you can look at that as two different application spaces. We have been designing 48 modules in the past in the telecom and networking space for many years. And for that reason, we have the expertise, the technologies and the experience that we can put that very quickly into data center application space. It takes time to go to mass production, but these wins really prove our technology and support our long term targets of of adding, an annualized revenue of over $100,000,000 incremental by 2023.

Speaker 7

Excellent.

Speaker 5

Thank you, and congratulations again, you're welcome.

Speaker 2

Thank you, Quinn.

Speaker 0

Your next question is from the line of Krish Sankar of Cowen and Company.

Speaker 8

Hi. Thanks for taking my question, and you all congrats on

Speaker 5

a solid term at AE.

Speaker 3

Thank you

Speaker 2

so much.

Speaker 8

Thank you. And I have two questions. First one is on semi. You spoke about sequential growth in Q1 and Q2. Is that mainly a function of NAND spending moving through the system?

Or are you seeing, like, other aspects of WFE giving you the strength in q one and q two?

Speaker 2

I think it's the it's the same market drivers that that you all see in terms of, both NAND and foundry. But at the same time, we see a few we have a few unique drivers to drive our business in semi. As you know, we have grown our RF matching business faster than the market. We have new products that we launched to the market. We expect to see growth.

Also, we continue to gain share in cross selling the embedded power supplies into the $300,000,000 SAM of the embedded power application space in the semi industry. So we have multiple drivers that will grow our business. But I can tell you that from our vantage point, right, and the information we gather, demand is going to be strong in Q1 and accelerating in Q2. And obviously, as I mentioned earlier, everybody's challenge right now is going to be based on can we all get the IC components to deliver those products on time to market. But the demand is strong and very excited.

We expect 2021 as we said earlier, in general, to be a growth year for us. Obviously, what we see right now in the semi space is is an accelerated growth in demand.

Speaker 8

Got it. Very helpful, Yuval. And then a quick follow-up. May you give some color on data center and, you know, the digestion that you're seeing there? I think you mentioned in your prepared comments, it should, you know, pick up later this year.

I'm kinda curious where what is the catalyst or, you know, leading indicator you're looking for? Is it more like IT enterprise budgets improving, or what what are the key drivers for, you know, data center to recover in the second half?

Speaker 2

Well, you know, the industry is launching new microprocessors and adopting new microprocessors. So a lot of the buying demand in data centers is driven by the microprocessors or GPUs that are being launched to the industry. Now we are in a very unique position, Krish. We came from zero just two years ago and have grown the business. As you saw, our growth rate in 2020 was 250%.

As we came from nothing to becoming a viable bonafide leading player displacing incumbents and gaining market share. We are as a lagger, we do not have the presence among all the hyper the tier one and tier two hyperscalers. And for that reason, we saw this surge in growth in 2020. But at the same time, as the industry go through digestion, our presence is still small. Right?

So we expect the industry to grow later this year and we expect our growth rate to continue few years out as we transition our design wins into mass production and to growth. And as we reported, we we have additional design wins at top tier hyperscalers that we expect to convert to to revenue later this year.

Speaker 8

Got it. Got it. Thank you all, and, congrats again for everything you guys done for AE.

Speaker 2

Thank you, Chris. Appreciate it. Your

Speaker 0

next question is from the line of Amanda Scarnati of Citi.

Speaker 9

Hi. Good morning. First off, Yuval, congratulations and enjoy retirement.

Speaker 5

Thank you, Amanda.

Speaker 9

You're welcome. I just wanna follow-up on that, DC digestion topic that you're just talking about. You know, should we think about this as sort of similar to semis where we see, you know, a big step up in inventory build in in data centers followed by a large period of digestion? Or is it really just a matter of you're still early on in building out this market, and it's going to be lumpy going forward? So which way should we look at the cyclicality or just lumpiness in in getting started?

Speaker 2

Yeah. It's a good question, Amanda. I think it's both. There is definitely digestion in the in in the market. You know, as you heard from Edwin, I think last time we talked publicly, the timing of Intel, you know, transition to Intel's new technology affected the whole market.

The transition to new microprocessors affected buying decisions. And also, these are very large investments, capital investments, they tend to have this very static behavior of large investment digestion followed by large ingestion digestion. Now if if if we were in our case, if we were present in all the players today, right, we will see less fluctuations because we're not all of them, you know, are lumpy at the same time. The fact that we have only a third of the market and growing make us a little bit more susceptible to the expansion and contraction as we continue to grow, as we continue to migrate our, you know, design wins into mass production, obviously, we will be more diversified and less susceptible to the lumpiness.

Speaker 9

Great. And then switching over to the semi side,

Speaker 5

you know,

Speaker 9

can you talk about any sort of pull ins that you might be seeing or unusual demand on the OEM side and and how, if at all, you're handicapping SMIC and and China generally in your guidance?

Speaker 2

I don't I don't think that we saw any abnormal behavior in in the in in the semi business. You know, the way we operate with our key customers in semi is is based on just in time. They pull our product from the hub when they need them. They give us demand signals and indicators going forward. And what we see right now, as I said earlier, is real demand growth, real demand growth, that is right now on a short term affected by the availability of IC components that we all need including the automotive industry.

We all need to build products. Regarding SMIC, honestly right now as we look at, you know, at SMIC, we cannot comment on on SMIC. And I think everybody, including our customer, is trying to get license to ship product to SMIC. So I don't think that at this stage, we can comment on that.

Speaker 9

Thank you.

Speaker 0

Your next question is from the line of Pavel Molchanov of Raymond James.

Speaker 5

Yes. Thanks for taking the question. One of the things that's obviously happened since the last earnings call is the Biden's inauguration and the prospect of trade normalization between The U. S. And China.

To the extent that you have faced any regulatory or other pressure in the Chinese market as a U. S. Company, I'm curious what kind change would be meaningful from AE's perspective specifically?

Speaker 2

Thanks, Pavel. So I think that you're going to see any change at AE as a result of the change in administration. The one thing that we are really proud about is our decision two and a half, three years ago to diversify our operation around the world with a focus on business continuity strategy that led us to build our factory in Malaysia way before even everybody talked about elections. And the whole idea was to ensure that we have the ability and the nimbleness to address geopolitical changes, political changes, IP risks, etcetera. So the fact that we have our our global footprint, the way we have it today, allows us to be extremely flexible and to make a decision together with our customers where to build our product and where to ship it.

So you can imagine, we can ship, we can make in China to ship to China. We can make outside of China to ship to outside of China. And it's all in full alignment with our customers and obviously with alignment, full alignment with local regulatory requirements. So one of the reasons that we have done so well last year through the challenges of COVID nineteen was this ability to be nimble and flexible and agile. So right now, we're not freaking out about the change in administration.

We also believe it's gonna take time for any decision to take effect. And if it if it if it does, we have the agility to respond to it.

Speaker 5

Okay. That's That's helpful. Follow-up question on the dividend. At the time that you guys were setting the rate $0.10 a quarter, obviously, the stock was quite a bit lower than it is today. So the yield now is barely 0.3.

Are you ready at this stage to commit to a progressive dividend policy? You don't need to say how big the increases will be, but just will there be a plan to raise the dividends, you know, with earnings or at some kind of annual road map over time?

Speaker 3

Yeah. It's a it's a good question. Obviously, that's a decision that we would revisit over time and and the board will revisit. But when we introduced the program, we actually said that there's room for that to grow. So, you know, obviously, there's no specifics around that, but but there's certainly room for that to grow over time.

Speaker 5

Alright. I'll leave it there. Thank you, guys. Thank you.

Speaker 0

Your next question is from the line of Pirtash Mitra of BCM.

Speaker 7

Great. Good morning. Thanks, guys. So just wanted to circle back on this news flow about chip shortage. And was just wondering if there's any role advanced energy can play in terms of helping customers increase production.

So anything that basically that can be done from the power supply side that can boost their productivity?

Speaker 2

Well, obviously obviously, if customers decide, if end use customers decide to add capacity, to manage, the demand, the increase in demand for IC devices, we will be benefiting from that because we our power supplies enable the semiconductor processing, you know, tools and technologies. We cannot influence the market, but we can respond to the market quickly. You know, we were monitoring, you know, look at, you know, over the the last thirty eight years that I've been in the semi industry, we've been there before when the market enter into, you know, shortage of components, And in general, what you see is an increase in effort and sometimes in cost of getting components through various channels. And at the same time, increase in capacity growth where with some companies that are able to respond quickly and increase capacity, really gear up, get equipment and increase the capacity of the fab. So it's a very dynamic environment.

We've been there before. We have a very nimble and sophisticated supply chain management team and processes that will allow us to recover.

Speaker 7

Thanks. Thanks for all these details. And I guess a follow-up for Paul for modeling purposes. Any changes to income statement items like depreciation, SG and A, tax rate relative to q four that you think is worth flagging as we think about q one and beyond?

Speaker 3

Yeah. We tried to comment on that in the prepared remarks, but there should I'll say, generally speaking, not a lot of change. We talked about, you know, OpEx up slightly. We talked about the tax rate staying in the 15% range. So no no no big changes in those in those various line items.

Speaker 7

Thanks, Paul. And again, congrats you all for all that you achieved in your career and all the best for the next phase in your life.

Speaker 2

Thank you very much, Paratosh.

Speaker 0

Thank you. Our next question comes from the line of Weston Twigg of KeyBanc Capital Markets.

Speaker 3

Hey, thanks for taking the question. Real quickly, the

Speaker 5

semi cap demand sounds extraordinarily strong in the first half of the year. You said it's accelerating in Q2. And I'm just wondering, I don't know what your visibility is. I know it's typically not more than a quarter or two. But regarding the second half, do you think that acceleration continues or do

Speaker 3

you see any signs of moderation from your customers?

Speaker 2

Wes, I don't think we are you know, we have that visibility. I I I cannot comment on the second half. In general, as you heard from our partners and customers, the expectation in general consensus is 2021 is going to be a growth year, an exciting year in semi. We agree with that. We support that.

The one thing that became clear to us as we speak is that this demand in Q1 will accelerate in Q2 and we have enough demand signals that allow us to stay back. The demand is strong Q1, growing in Q2. And as I said earlier, it's all about the ability to deliver on time on this demand. And it has to do with the shortage we talked about. I can't comment on the second half.

I can tell you again, 2020 year 2021 will be a growth year for the industry and will be a growth year for Advanced Energy.

Speaker 5

Okay. That's helpful. And then just finally, versatile power. Can you tell us how much of a revenue contributor that is?

Speaker 2

It it's, Wes, it's very small. The acquisition was an example of a tuck in acquisition of unique technology, unique product with unique capabilities that brings a very special relationship with one of the leading surgical equipment companies in the world. And from that point on, we expect to see growth, due to our scale and footprint and market outreach.

Speaker 5

Okay. That's helpful. Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. And that does conclude the q and a portion of today's call. I will now turn the call back over to Yuval Wasserman for any closing remarks.

Speaker 2

So I'd like to thank everybody for your support and engagement and partnership over the last six years or six and a half years. It's been a pleasure to get to know you all and working with you. I'm excited about the future of the company. I'm excited about Steve Kelly joining us. He brings all the attributes to be a great successor to take the company to the next level while I'm fading away and pursuing my personal interest.

I will remain in the company until March 2022 to support the Board and Steve. Thank you again and have a nice day.

Speaker 0

Thank you. This does conclude today's conference call. You may now disconnect.